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The earned income tax credit (EITC): refund delays and audit risks

The earned income tax credit (EITC) is supposed to help people with low income, especially those with children, by providing a refundable tax credit.

In recent years, however, the IRS has stepped up audits of returns that claim the EITC, after critics contended that the credit was awarded too freely.

In this post, we will use a Q & A format to update you on how a new law will delay refunds on returns that claim the EITC.

What is the new law that affects the EITC?

The new law that affects EITC claims is the Protecting Americans from Tax Hikes (PATH) Act of 2015. A section of the PATH Act directs the IRS to delay refunds to taxpayers who took the EITC or another tax credit called the additional child tax credit (ACTC).

These delays take effect this year. Under the law, the IRS has to wait until filing season has been underway for three weeks before issuing refunds on returns that claim the EITC or the ACTC.

This means refunds on those returns will not be available before February 15. And the IRS will be holding the entire refund, not only the part that involves EITC or ACTC.

Why did Congress impose these specific delays on refunds involving the EITC and the ACTC?

The EITC and the ACTC are refundable even to taxpayers who owe no tax. This means that low-income taxpayers - or tax preparers, on their behalf - have strong incentives to take the credit, even if eligibility for the credit seems a little doubtful.

Unfortunately, scammers also take advantage of the fact that the EITC and the ACTC are refundable. Fraudsters often try to file bogus tax returns before the IRS receives W-2 or 1099 information that can be used to verify the income on a return. The delay in issuing refunds on returns claiming the EITC or the ACTC is therefore supposed to help deter tax refund fraud.

What about tax audits on returns that claim the EITC?

The IRS has made audits of returns that claim the EITC a priority in recent years. To be sure, this doesn't necessarily mean that a particular return will be audited, just because the EITC is involved. But taking the EITC does increase the chances of an audit.

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